The Hindu Business Line : Kelkar hints at changes in report

DR Vijay Kelkar, Advisor to the Finance Minister, today gave an indication that his panel on direct and indirect taxes would look at incorporating changes or even dropping some of the recommendations made in the Consultation Paper, considering the storm it has raised in both political and business circles.

The recommendations in the final report, to be submitted by December, would be firmed up only after a thorough debate, Dr Kelkar said at a conference on `India's tax competitiveness' organised by the Federation of Indian Chamber of Commerce and Industry here.

The list of controversial proposals include the phasing out of tax deductions on interest on housing loans for self-occupied houses, elimination of tax rebate under Section 88, withdrawal of tax holidays extended to profits made by corporates who have invested in infrastructure projects under Section 80 IA and 80 IB and graded tax holiday for special economic zones.

Dr Kelkar, nevertheless, made a spirited defence of the direct taxes proposals, saying it would help bring down the cost of both — debt capital and risk capital, thereby fostering competition and growth.

The withdrawal of tax rebate on savings instruments at the time of accrual, for instance, would reduce the cost of debt capital as it would eventually help bring down interest rates. The other spin-off would be an increase in discretionary income in the hands of the taxpayer.

"We have done a detailed analysis on the impact of the removal of tax incentives under each income group and in every case the discretionary income goes up," Dr Kelkar said, adding that "incentives which appear rational at the micro level are irrational at the macro level".

Similarly, with interest rates heading southwards, there was a case for phasing out the existing deduction for mortgage interest on housing loans in self-occupied houses.

Corporates, which pitched for a further cut in the corporate tax rate from the recommended statutory level of 30 per cent, were merely told that the rate had been worked out after factoring in the abolition of dividend tax, minimum alternate tax and long-term capital gains tax (LTCG) on equity.

Dr Kelkar also made it clear that corporate profits should bear the full burden of corporate tax. "If profits are taxed at 30 per cent, there is no need to have MAT or LTCG. Further, corporate governance would improve if there is no divergence between taxable income and book profits," he held.

The Advisor to the Finance Minister was of the view that sector-specific tax incentives were non-transparent in nature and encouraged rent-seeking.

"If the Government considers it necessary to support any sector, this should be done through a subsidy from the expenditure Budget. However, wherever the Government has made contractual commitments in some sectors, these will have to be honoured," he said.

Dr Kelkar also clarified that the proposal to disallow interest paid on borrowed capital as deduction would not apply to the revenue expenditure component of interest which will continue to qualify for deductions.

According to him, the indirect tax proposals, which cover reduction in tariffs to ASEAN levels, would bring down the effective rate of protection and reward industries which are efficient.

The proposed reforms in indirect taxes would eventually help in bringing down transaction costs and place systems and procedures at par with the best international practices in the world.

Send this article to Friends by E-Mail
Comment on this article to BLFeedback@thehindu.co.in

Stories in this Section
Positive impact on Indian currency seen — Moody's upgrade likely

Petro prices set to soften

Kelkar hints at changes in report

Microsoft has mega plans for HiTec City unit

RBI sets terms for PNB, Nedungadi Bank merger

Nedungadi staff elated

Film-makers have a field day in Pollachi